The
Area
The office building at 6400 Laurel Canyon presented an attractive
opportunity in an incredible area. The North Hollywood area
boasts one of the highest population densities in Southern
California, and by extension, the U.S. The intersection of
Laurel Canyon and Victory in North Hollywood has an average
daily car count of 43,000, and is located just two blocks
from the 170 freeway. Snyder’s planned multi-story retail
development of approximately 660,000 square feet on the northwest
section of this corner is one of the most anticipated new
developments in the valley. All of these factors combine to
give real estate in this area intrinsic value beyond most
locations.
The
Opportunity
At the center of this area is 6400 Laurel Canyon, an office
building of 87,000 square feet with an attached parking structure.
In 2004, this building claimed less than 40% occupancy as
a result of the ownership consisting of an out-of-the-area
sponsor, with an out-of-the-state investor, and a leasing
team from the Westside of LA. However, with a market vacancy
for office at 92%, the property was poised for an experienced
investor to capitalize on this under-valued property.
Quickly
recognizing the opportunity in this asset, Milan purchased
the property after a thirty day escrow and set to work implementing
a program of small spec suite development and aggressive initial
move-in incentives. By December 2006, the property boasted
95% occupancy with rents 20% higher than forecasted.
The
Results
In two and a half years of ownership, Milan stabilized the
property, returned more than 100% of the initial invested
capital to investors, and expects to raise net income over
25% through the next five years as a result of scheduled rental
increases and favorable tenant rollover rates. The property
was refinanced in 2006 with low interest rate CMBS debt. Milan
and its investors have received offers to purchase the property
at prices 70% higher than their cost basis in the property.
With the effects of leverage, investors would have achieved
a 59% IRR if they had chosen to sell, but with upside left
to achieve at the property, and with the property still valued
well below replacement costs, the investors remain in this
property for the long term.
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